Europe

German Chancellor Angela Merkel declared the Group of Eight leading nations defunct given the current crisis in Ukraine, in a clear message to Russia that the world’s seven other major industrialized countries consider its actions in Ukraine unacceptable. “As long as there is no political environment for such an important political format as the G-8, the G-8 doesn’t exist anymore, not the summit nor the format,” said Ms. Merkel, in Germany’s parliament, the Bundestag. “Russia is widely isolated in all international organizations,” the chancellor said.

Ah, yes, the old “isolated in all international organizations” gambit. And what have all the “international organizations” done in reaction to Russia’s Crimean takeover? About what they did when Russia pushed into Georgia. A whole lot of nothing. It is one thing to have international organizations that have teeth and are willing to do something in reaction to such a blatant act. But when they mostly issue statements condeming the action and void the Netflix accounts of certain Russian officals, being isolated from those organizations isn’t such a big deal. All it does is make further diplomatic efforts more difficult, not that it is clear that Russia is open to diplomatic overtures.

Another thing that is happening is Europe is discovering it has managed to put itself in an energy situation that isn’t at all to its advantage. 30% of Europe’s natural gas flows through Russian pipelines (Germany gets 40% of its natural gas supplies from Russia).

European leaders will seek ways to cut their multi-billion-dollar dependence on Russian gas at talks in Brussels on Thursday and Friday, while stopping short of severing energy ties with Moscow for now. EU officials said the current Ukraine crisis had convinced many in Europe that Russia was no longer reliable and the political will to end its supply dominance had never been greater. “Everyone recognises a major change of pace is needed on the part of the European Union,” one EU official said on condition of anonymity. As alternatives to imported gas, the Brussels talks will debate the European Union’s “indigenous supplies”, which include renewable energy and shale gas.

Now, one would think that such a situation would call for drastic and speedy action. Anyone want to bet how long they dither and, should they decide to exploit their “indigenous supplies”, how onerous the rules and regulations will be?

When leaders of the European Union’s member states meet today and tomorrow (20-21 March) in Brussels, they hope to reach consensus on the EU’s long-term climate goals. But agreement appears unlikely because of deep divisions between east and west. Ahead of the summit, ministers from 13 member states signed a declaration supporting a European Commission proposal for an EU commitment to reduce carbon dioxide emissions by 40% from 1990 levels by 2030 – up from a 20% target set for 2020. This ‘green growth group’ includes France, Germany, Italy and the UK. But Bulgaria, the Czech Republic, Hungary, Poland, Romania and Slovakia are wary of the target and the timeline, and are resisting any such commitment.

The latter group will most likely be all for moving ahead as speedily as possible to exploit “indigenous supplies”. They’ll meet some pretty stiff headwinds, apparently, from the Western EU nations. You can almost see this train wreck coming.

Governments across Europe, regretting the over-generous deals doled out to the renewable energy sector, have begun reneging on them. To slow ruinous power bills hikes, governments are unilaterally rewriting contracts and clawing back unseemly profits.

You have to laugh. “Unseemly profits”? They’re subsidies, sir. Not profit.

It’ll be interesting to see if the EU has the will to sort this all out in the next couple of days. If one is a betting person, you’d have to guess that the odds for success are long, given the EU’s recent history.

One of the foreign policy promises Barack Obama made was that during his presidency, America would have a “light footprint” on world affairs. Our first indicator of what that meant was the action in Libya when the US “led from behind”. The Obama administration belived that pulling back from our strong presence and position in the world would help mollify other powers and usher in a new era of peaceful cooperation with America as a partner and not necessarily the leader.

The White House was taken by surprise by Vladimir V. Putin’s decisions to invade Crimea, but also by China’s increasingly assertive declaration of exclusive rights to airspace and barren islands.

Neither the economic pressure nor the cyberattacks that forced Iran to reconsider its approach have prevented North Korea’s stealthy revitalization of its nuclear and missile programs. In short, America’s adversaries are testing the limits of America’s post-Iraq, post-Afghanistan moment.

“We’re seeing the ‘light footprint’ run out of gas,” said one of Mr. Obama’s former senior national security aides, who would not speak on the record about his ex-boss.

What we’re actually seeing is naivete in foreign policy head toward a predictable conclusion. Foreign policy isn’t bean bag and it has been established many times in history that the retreat of a great power from the world’s stage will see other seemingly lesser powers attempt to fill or take advantage of that power vacuum.

The “light footprint” didn’t “run out of gas”, the light footprint was foreign policy destined for failure from its inception. Mr. Obama and his foreign policy team were warned about that constantly and preferred to ignore both the warnings and history.

Mr. Obama acknowledges, at least in private, that he is managing an era of American retrenchment. History suggests that such eras — akin to what the United States went through after the two world wars and Vietnam — often look like weakness to the rest of the world. His former national security adviser Thomas Donilon seemed to acknowledge the critical nature of the moment on Sunday when he said on “Face the Nation” that what Mr. Obama was facing was “a challenge to the post-Cold War order in Europe, an order that we have a lot to do with.”

But while Mr. Donilon expressed confidence that over time the United States holds powerful tools against Russia and other nations, in the short term challengers like Mr. Putin have the advantage on the ground.

Mr. Obama is managing “an era of American retrenchment” he initiated.

It doesn’t look like a period of weakness to the rest of the world, it is a period of weakness that is compounded by our weak leadership. We’re engaged in bringing our military down to pre-WWII levels and we’ve made it clear that we’re not interested in fulfilling treaty obligations with the likes of the Ukraine. How else would one interpret our actions?

And, of course, one of the best ways we could address this particular crisis is to up our shipments of natural gas to Europe so they weren’t dependent of Russian pipeline supplies that flow through the Ukraine. That would give Europe some leverage because they wouldn’t be held hostage by their need for Russian petro supplies. But on the domestic front, the Obama administration has made building the necessary infrastructure to cash in on our growing natural gas boom almost impossible.

Are Russia and others testing the limits? You bet they are and all of those interested in those limits are watching this drama unfold. To this point, it appears Russia sees no downside to its action. Should that continue to be the case, you can be assured other nations will also “test the limits.”

This is Mr. Obama’s 3am phone call. And it appears he has let it go to the answering machine.

You remember the grand promises a certain candidate made in 2008. And in the area of foreign policy he told us how huge a mess it was and how he was going to clean it up and how the world would love us again. He was going to “reset” relations with Russia and get us out of all these wars. Oh, and of course, solve the problems in the Middle East.

The [Middle East] is unraveling and American policy is in deep disarray. Our strategic options are getting worse, and the stakes are getting higher. When former President Bill Clinton is warning that his successor risks looking “lame” or like a “wuss” or a “total fool,” it’s a safe bet that the Kremlin and Tehran aren’t impressed by White House statements. Meanwhile the Obama administration seems to be locked into a sterile, short-term policy approach driven by domestic considerations; it is following the path of least resistance to a place that in the end will please no one and is increasingly likely to lead to strategic disaster.

An insightful article by the Democratic-leaning Bloomberg columnist Jeffrey Goldberg offers a deeply unsettling view of a Syria foreign policy process gone off the rails. If Goldberg has the story right—and he usually does—Secretary Kerry and the bulk of the White House security team want the President to authorize a no-fly zone and other strong measures in Syria, in part because they fear that American dithering in Syria is empowering the hardliners in Tehran and that by avoiding a small war in Syria now the White House risks a much uglier confrontation with Iran not all that far in the future. But the Chairman of the Joint Chiefs wants nothing to do with it, pointing to the difficulties and costs of the military mission.

And rightfully so. It has also really “reset” relations with Russia … to the Cold War era. Well done, Mr. President. But that’s not the real problem is it? It is how we got in this mess in the first place: Amateur Hour at the White House:

As Goldberg tells it, the biggest problem for the administration is that its early aggressive, poorly judged rhetoric that Assad “must” go now makes it impossible to avoid Obama’s looking like an irresolute bluffer if the Butcher stays put. This is the conclusion, anyway, that both Russia and Iran will draw, and they will respond by pushing the US along other fronts as well.

This is an entirely self-created problem; there was absolutely no objective reason for the administration to lay those markers on the table. There was no requirement in America’s foreign policy that the administration bounce in with the categorical demand that Assad step down.

That is absolutely correct. But as is mentioned further on it was fighting for re-election and didn’t what there to be a wimp factor. As usual, politics trumped what was best for the nation.

When John F. Kennedy delivered his “Ich Bin Ein Berliner” speech in front of the Brandenburg Gate on June 26, 1963, 450,000 people flocked to hear him. Fifty years later a far more subdued invitation-only crowd of 4,500 showed up to hear Barack Obama speak at the same location in Berlin. As The National Journal noted, “he didn’t come away with much, winning just a smattering of applause from a crowd that was one-hundredth the size of JFK’s,” and far smaller than the 200,000 boisterous Germans who had listened to his 2008 address as a presidential candidate.

As for the Middle East … well there’s no love lost there either. This administration has fumbled everything to do with the region during it’s tenure and has no one to blame but themselves. They’ve totally and without any help, managed to bottom out our image in the area in the same way they’ve bottomed out the economy. If this guy isn’t the worst president with the worst team we’ve ever had inflicted on us … twice … then I don’t know who might be. And don’t even get me started on the “leadership” in Congress – from both parties. They’re absolutely the worst yet. That may come as small consolation to the administration, but the combination of the two is killing us.

According a report by Reuters, much of it is related to the looming crisis in Europe:

Only 23 percent of the firms polled in June plan to add to staff in the next six months, the National Association for Business Economics said on Monday.

NABE’s prior survey, conducted in late March and early April, had shown 39 percent of companies planning to add workers.

The point, of course, is now is certainly not the time, with unemployment at 8.2%, to give business another reason to delay hiring, right? That would seem, to most, to be a reasonable point. While the European problem unfolds and comes to some sort of resolution, you’d think government would be attempting to encourage and enable domestic businesses to do some hiring anyway, right?

Instead, as demonstrated in the story below, you have a president (and a party) who seem dedicated to killing whatever possibility there is for such hiring in the bud by calling for higher taxes on the “rich”.

Of course they count on the bulk of the public being ignorant of what comprises the “rich” that the administration wants taxed (small business which produces 85% of the jobs in the US) and certainly, to some extent, they’ve been successful in that endeavor.

Many will tell you that there’s really not much government can do economically. That they get blamed or praised when it goes south or does well, but in fact that’s more political tradition than reality.

I disagree. Economic policy can have a profound effect on the economy. A policy that encourages and enables business will have a net positive effect economically. One that discourages or unsettles the business climate (increased regulation, increased taxation, etc.) will have the opposite effect.

Right now we have an example of the latter. The 8.2% unemployment rate we now endure isn’t a result of the “European crisis”, it is the result of an unsettled and hostile domestic business climate, much of it created by the current administration’s policies. Europe’s woes will only add to that. Instead of doing everything they can domestically to encourage expansion and hiring, this administration has decided to again lobby for taxing the job creators at an even higher level.

Of course be prepared for the ready excuse that the crisis in Europe presents. Blaming Bush doesn’t work as well now as it did 4 years ago. ATMs and tsunamis won’t work either. But President “It’s the Other Guy’s Fault” will try very hard to shift the blame of any economic downturn in the next few months across the Atlantic.

But remember – we are at 8.2% now. And that has much more to do with this President’s policies than anything that has happened in Europe.

Manufacturing activity in China and across a wide swath of Asia slowed in May, heightening fears that the turmoil in Western economies is dragging down one of the few remaining engines of global growth.

Two purchasing managers indexes for China fell in May, briefly rattling investors Friday and stoking speculation Beijing may have to respond aggressively to support growth. Indonesia posted its first trade deficit in nearly two years, and South Korea’s exports, considered a bellwether for Asia, unexpectedly fell for a third straight month.

"The green shoots of recovery that we were seeing a month or so back are wilting away," said Rob Subbaraman, chief Asia economist at Nomura Securities. "The crisis in Europe is one reason; the other one is the China slowdown. But I think less appreciated is that the height of uncertainty about the outlook has caused Asian firms and multinationals in Asia to pause in their investments, and I think that’s the bigger factor right now."

China’s official PMI, based on government data, showed manufacturing continuing to grow but by the barest of margins, falling to 50.4 in May from 53.3 in April. A figure above 50 indicates expansion. An index produced by HSBC and Markit showed Chinese manufacturing was worse, falling to 48.4 in May from 49.3 a month earlier.

"We feel that in China a very powerful stimulus"—combining fiscal outlays and cuts to banks’ reserve requirement ratio—"is required to arrest the slowdown in growth," said Frederic Neumann, co-head of Asian economic research for HSBC. "These numbers today suggest this is coming sooner rather than later. If that stimulus is not delivered, then China is indeed looking at a hard landing."

The economies of Asia, both the emerging markets and the more developed countries, are being hit by a double whammy of slowing domestic growth and the impact of the European debt crisis on Asian exports and finance.

Signs of distress are proliferating.

In India, the government reported Thursday growth in the first three months of the year at the slowest pace in the past nine years—up 5.3% from the year-earlier quarter, well below the 8% pace of recent years. "A gasping elephant," said Leif Lybecker Eskesen, HSBC’s chief India economist, in a note to investors.

In China Friday, an official gauge of manufacturing activity fell to a lower than expected level, which is likely to add to market concerns about China’s slowdown. China’s official Purchasing Managers Index fell to 50.4 in May, compared with 53.3 in April and lower than the median forecast of 51.5. A reading below 50 indicates contraction. The Ministry of Commerce, meanwhile, is blaming "worse-than-expected" economic performance in Europe for disappointing export data.

Early Friday, South Korea said its exports unexpectedly contracted for a third consecutive month in May compared with a year earlier. South Korea is the first country in Asia to release trade data for the month and is often a harbinger of regional trends.

The euro zone’s deepening fiscal crisis continued to take its toll on some of the neighboring economies of central and eastern Europe in May, as surveys released Friday indicated manufacturing activity contracted again in May.

The countries in Europe’s center and east have close trade and financial ties with the euro zone, and some have seen demand for their exports weaken as the currency area’s economy has stalled, while western Europe banks have cut their lending to the region.

A double whammy. And, finally, within the Eurozone itself, companies are trying to prepare for the Greek withdrawal from the zone (and possibly Spain’s as well):

As European officials race to quell fears that Greece may exit the euro, many companies doing business in the troubled country are preparing for the worst.

Most executives, analysts and others agree on one thing: the impact of a Greek withdrawal from the euro zone is impossible to predict. That’s why multinational companies are rehearsing for any number of contingencies. They range from a paralysis in cross-border payments to a civil breakdown in Greece to a broader breakup of Europe’s common currency.

Retrieving their cash is among the companies’ gravest concerns. If Greece were to revert to its former currency, many companies fear that any euros left there would be converted into less-valuable drachmas. Should that happen, Greece is widely expected to impose capital controls to keep the remaining cash in the country.

Can you say “completely mess?”

Meanwhile, here, the business climate remains unsettled, hiring still isn’t showing any real turnaround and the economy continues to bang along the bottom (one assumes, it could drop again if the Euro crisis explodes) with no real trend upward.

Dale’s post, “Fantasy v. Reality” is spot on. And there are plenty of examples of his point to be found. One of the characteristics of those who live in the fantasy side of things is their continued denial of the real cause of Greece’s problems specifically and Europe’s problem generally.

They, like certain politicians on this side of the pond, want to lay it off on others – the implication being that if that situation is changed, the problems that Greece and other countries are encountering will resolve themselves.

And then what? And then the strategy would appear to be to cauterise the amputation; to circle the wagons; to issue the most ringing and convincing proclamation to the markets that no more depredations will be tolerated; and to get the Germans to stump up, big time, to protect Spain and Portugal. We are told that the only solution now is a Fiscal Union (or FU). We must have “more Europe”, say our leaders, not less Europe – even though more Europe means more suffering, and a refusal to recognise what has gone wrong in Greece.

The euro has turned out to be a doomsday machine, a destroyer of jobs, a killer of growth, because it entrenches and exacerbates the fundamental and historic inability of some countries to compete with Germany in making high-quality goods with low-unit labour costs. Unable to devalue their way back into the game, these countries are forced to watch industry wilt under German imports, as the euro serves as a giant trebuchet to fire swish German saloon cars and machine tools across the rest of Europe.

Germany is almost alone in recording economic growth in the first part of 2012; Germany is doing well from the euro; and so the theory is that Germany should pay to keep the whole racket going by bailing out the improvident and the uncompetitive, just as London and the South East subsidise the rest of the UK.

Alas, it is not a strategy that is likely to work. As Angela Merkel has made clear, there is little political support – let alone popular support – in Germany. EU leaders may want a fiscal union, but it is deeply anti-democratic. We accept large fiscal transfers in this country because Britain has a single language and a single political consciousness in a way that Europe never will. Rather than creating an “economic government of Europe”, the project will lead to endless bitterness between the resentful donors and the humiliated recipients, as these diminished satrapies will be instructed to accept cuts and “reforms” – designed in Berlin and announced in Brussels – as the price of their dosh.

Or, “it’s all Germany’s fault”.

Germany implemented Greece’s labor laws, work week, retirement age, public pensions and government subsidies. You didn’t know that? It’s Germany’s fault that it has all caught up with Greece in a down global market. If Germany wasn’t so damn good, Greece would be in such damn bad shape.

Really. That’s what this guy is pushing. I mean, my goodness, imagine – “high-quality goods with low-unit labor costs”. How dare they? How can one pump up a welfare state and keep it going with competition like that? It is Germany’s job to enable Greece’s work 38 hour week. Germany’s job to ensure their generous pension plans, early retirement, subsidies and welfare payments.

How dare they do otherwise. They owe Europe. They owe the rest of Europe the lifestyle they desire but can’t afford.

The narrative the left likes to push is that “austerity” is the wrong thing to do, that increased government spending will see us out of these tough times. And they like to point to Europe’s continuing downward spiral because of “austerity” as proof.

Meh. They should consult the numbers first before pumping out yet another false meme:

Hardly a picture of “drastic” spending cuts. Hardly a picture of “austerity.”

Government spending has continued to rise across much of Europe, and even those countries that have made small cuts have not reduced government spending to pre-recession levels. Some Keynesians might believe that these policies are draconian relative to the massive spending that should have happened during a recession, but that shifting the austerity goalposts.

Veronique de Rugy atNational Review Online points to the graph above, and also points out that "whenever cuts took place, they were always overwhelmed by large counterproductive tax increases." Higher taxes on the "rich" have led to uniform misery in Europe–and to political extremism among disenchanted voters.That is the real failure of European policy, and the lesson most relevant to Americans as we head to the polls to choose between an incumbent who wants to raise taxes and one who wants to reform them.

Or to distill this even further, the “blue social/political model” is dying and there isn’t much the left (or anyone) can do to save it. Reality has again defined “unsustainable” for the left in terms they are finding difficult to deal with.

Via Zero Hedge, I’ve acquired this very interesting little chart, that shows the number of margin calls on its credit-extensions to counterparties. Huh. Now, see, I just wrote that, and I have no idea what it means. It’s just lots of economic gobbledy-gook when you write it out in a single sentence like that. But, here, let’s take a gander at the chart, then I’ll explain, in human terms, what it tells us.

So, the European Central Bank (ECB) had this great idea, which was to implement a European version of Quantitative Easing. They called it the Long-Term Refinancing Operation, or LTRO.

It was actually pretty simple. The banks would go to the ECB and get an LTRO loan by providing collateral of some sort—generally A-rated securities. By which, I mean a security that at least one rating agency has rated as "A". Like, you know, Italian bonds. They don’t actually have to give the collateral to the ECB or anything, just let them know that, "Hey, we’ll just keep it safe, and can hand it over if we really have to." On the strength of those assurances, and the sterling quality of the collateral in question, like Spanish bonds, the ECB then gives the banks a huge hunk of cash. The banks then get to keep the money for up to three years, but are only charged the average overnight rate of interest.

Now, as long as the securities you put up for collateral are good, like Irish bonds, it’s a pretty sweet deal. Alas, if the securities turn out not to be so reliable, the ECB will make a "margin call", that is to say, they will demand the banks come up with additional cash or other assets to cover the collateral.

As you can see from the charts, that is exactly what the ECB is is starting to do. That’s troublesome. You see, the ECB has a €3 trillion balance sheet. But it only has a bit under €11 billion in actual assets. So the ECB has a leverage ratio of a little under 300:1. So, it really does have to go after better assets from the banks if the initial collateral turns, you know, sucky.

The problem then is, as Tyler at Zero Hedge puts it:

The rapid deterioration in collateral asset quality is extremely worrisome(GGBs? European financial sub debt? Papandreou’s Kebab Shop unsecured 2nd lien notes?) as it forces the banks who took the collateralized loans to come up with more ‘precious’ cash or assets(unwind existing profitable trades such as sovereign carry, delever further by selling assets, or subordinate more of the capital structure via pledging more assets – to cover these collateral shortfalls) or pay-down the loan in part. This could very quickly become a self-fulfilling vicious circle – especially given the leverage in both the ECB and the already-insolvent banks that took LTRO loans that now back the main Italian, Spanish, and Portuguese sovereign bond markets.

Essentially, the LTRO program is beginning to suck higher quality assets out of the banks to meet the margin calls that are issued when the initial collateral’s value starts to go belly up. Sucking those higher-quality assets into the ECB’s LTRO collateral program, mean that they can no longer be used to finance business and consumer credit, and, thus, spending. The banks essentially become bond storage warehouses, that don’t actually do any business.

That slows the economy, of course. Which means that those original A-Rated securities stand e much better chance of defaulting, in which case, they’re worth nothing. As Seeking Alpha explains:

The real menace comes in the event of a further weakening of the Eurozone economy. If the economy were to contract, the collateral that the banks have pledged to the ECB may cease to be "performing" (seemingly the only hard criterion for collateral for the second round of LTRO). The ECB would be at risk–and ultimately so would the banks that pledged the defaulting securities.

Any defaults, be they of collateral or the banks themselves, would be a serious issue for the ECB. The ECB is supporting its EUR 3 trillion balance sheet with EUR 10.76 billion in capital–leverage of nearly 300 to one. With the fiscal situation of European sovereigns already strained to the breaking point, it’s hard to see where the money to cover the defaults could come from. This issue of a ballooning balance sheet, coupled with shaky collateral and the 3-year tenor of the ECB loans, is precisely why Trichet and Weber would not go the Draghi route. They bristled at the risk.

The odds of a calamity of the sort that would endanger the ECB are not great, but nor are they impossibly long.

Well, that huge jump in margin calls may be an indicator that those not "impossibly long" odds are getting shorter and shorter. And I wonder how much exposure US banks have to an LTRO default through credit/FX swaps. Probably…really a lot.

Days after General Motors announced it was temporarily suspending production of the Chevy Volt, the electric car was named European Car of the Year.

The Geneva Auto Show announced Monday that the Volt, which is sold in Europe as the Opel Ampera, was named its 2012 Car of the Year ahead of its annual car show that opens this week.

Europe, tottering on the brink of financial collapse because of unsustainable welfare state spending names a heavily subsidized car from a company owned in the majority by government that no one will buy as its pick of the litter (why, because it fits an agenda that no one buys as well).

Their proposal is preposterous. Anything can happen in this life, but it would be remarkable indeed if this idea got off the ground. Anyone pinning their hopes that this will solve the crisis needs to think it through.

Why would the Portuguese accept the right of Germany to impose budget cuts on their country? Why would the Greeks?

Would we accept that role for the Chinese and the Japanese, the biggest holders of Treasury debt? How would you feel if you opened the paper to be told that the new Sino-Japanese “Fiscal Stability Commission” in Washington had just slashed your grandma’s Social Security checks by one-third, scaled back federal highway repairs, and that it would impose a 10% national sales tax?

That is, after all, effectively what is being offered to the people of Greece, Italy, Spain, Portugal and Ireland.

It’s absurd. There is no reason why these countries should have to surrender sovereignty. They can simply, where necessary, default. A default by, say, Louisiana would not destroy the dollar. Neither did the bankruptcy of Enron or Lehman.

What happens when after signing the new treaty (if it ever actually comes to be) the Greeks or Italians decide to thumb their noses at the EU and default anyway? Kick them out? Isn’t that right where we are now? Isn’t the fear that countries are kicked out or leave leading to financial chaos and defaults? Will these countries truly continue to pay their bills and accept austerity in the face of a severe recession/depression?

If that is the concern, just as I have been pointing out for some time, anything short of true fiscal and political union will fail. The right of existing states to refuse to honor the treaty (remember the last one was treated as inconsequential by violators, including Germany and France) cannot exist which means the right of states to secede or be expelled from the union cannot exist. If that option is not off the table then Eurozone bonds cannot be treated as risk free. If they are not seen as risk free then they will be rated accordingly and the Eurozone will be unstable as Louis-Vincent Gave points out:

Basically, we have to remember that the average sovereign debt buyer is not a hazardous investor. The guy who buys a government bond is looking for a very specific outcome: he gives the government 100 only so he can get back 102.5 a year later. That’s all the typical sovereign debt investor is looking for. Nothing more, nothing less.

But now, the problem for all EMU debt is that the range of possible outcomes is growing daily: possible restructurings, possible changes in currencies, possible assumption of other people’s debt, possible mass monetization by the central bank etc. Given this wider range of possible outcomes, and the consequent surge of uncertainty, the natural buyer of EMU debt disappears. Again, the typical sovereign investor is not in the game of handicapping possible outcomes; he is in the game of getting capital back!

This is very problematic because once uncertainty creeps in, bonds will tend to gradually drift towards what I have come to call the bonds “no-man’s-land”. Basically, once sovereign bonds reach 90c to par, they tend to have a much higher volatility and much greater uncertainty. As a result, they are no longer attractive to the typical bond manager or asset allocator looking to buy bonds to diversify equity risk (think how Italian bond yields are now correlated to European equities. If you want to be bullish Italian bonds, you may now just as well spend a fifth of the money and buy European banks for the same portfolio impact…). And once a bond enters into no-man’s-land, it has to fall a lot before attracting the attention of distressed debt and vulture investors (usually yields of 15%+). So the first obvious problem is that more and more European debt markets are entering this “no man’s land” bereft of “normal” investors.

Do these countries need the Euro over the long term to be prosperous? More Brett:

The British look smarter and smarter for staying out of the euro area in the first place. Prime Minister John Major, and then, later, Chancellor of the Exchequer Gordon Brown, each took the decision to keep the British pound free. At the time fashionable opinion predicted disaster for the Brits. So much for that.

(Predictably, fashionable opinion now says the Brits look “isolated” for staying out. Really, you couldn’t make it up).

My guess is Brett is correct that we are no where close to a real resolution, which is a path to political unification or breakup.

It has long been clear the Franco-German duo wanted to use their shared currency to bludgeon the continent into something closer to a federal system.

Any investor pinning their hopes on this bird flying needs to be aware it looks a lot more like a turkey than an eagle.

This week’s meeting of European leaders already marks the fifth “summit” to solve the region’s debt crisis since early 2009.

My favorite comment this time: “After a series of ‘final’ summits, it would be nice this time to have a real ‘final’ summit.” That was from Standard & Poor’s chief European economist, appropriately-enough named Jean-Michel Six. What’s the betting Mr. Six will be attending Summit No. Six in the new year?

Which is not to say that the ECB or some other entity couldn’t stem the immediate crisis and kick the can further down the road. Maybe, but if so the question is how far? A week, a year, five years? That I cannot answer now.